First American Financial v. Edwards: Surprising end to a potentially important case

Posted Thu, June 28th, 2012 5:09 pm by Kevin Russell

UPDATED: 7 pm

Lost in the hubbub of the health care decision is the Court’s surprise punt in a case that many (including myself) thought would be the sleeper case of the Term. In First American Financial Corp. v. Edwards, No. 10-708, the Court was set to decide what limits Article III of the Constitution places on Congress’s power to create statutory rights enforceable through a private right of action.

The specific question before the Court in Edwards was whether a plaintiff alleging that her title insurance company violated the Real Estate Settlement Procedures Act (RESPA) must show that she suffered an injury from the insurance company’s unlawful conduct beyond the violation of her legal rights under the statute. RESPA prohibits title insurers and other real-estate-related companies from participating in kickback schemes related to real estate closings. Congress provided that a consumer who discovers an illegal kickback related to her closing can sue to recover statutory damages (and attorney’s fees) without having to prove that the violation caused her any financial injury or any diminution in the quality of the services she received. All she has to show is that the defendant violated her statutory right to have her closing free of the conflicts of interests that arise when the participating companies are paying each other kickbacks.

The defendant, First American, argued that the plaintiff had suffered no discernible injury from the alleged illegal kickback. Because the rates charged the plaintiff were set by state law, she suffered no financial injury. And she did not show that the quality of the services had been reduced by the kickback. In these circumstances, First American argued, Congress was forbidden by Article III from authorizing suit against the insurance company, even if the plaintiff could prove a violation of her statutory rights.

The lower courts rejected that argument, but the Court granted certiorari. The grant was somewhat surprising because there did not appear to be a significant circuit conflict on the question (the usual reason the Court grants review). Instead, it appeared that the Court was considering using the case to establish new Article III limitations on Congress’s power to create private rights of action.
It may be, however, that the members of the Court were unable to reach any consensus on what those limitations should be. It’s a tricky business. There is surface appeal to the idea that Congress cannot authorize suits by people who have suffered no injury. But for many years, it was considered black letter law that Congress could create statutory rights, the invasion of which created an injury in fact sufficient to establish Article III standing. But what First American proposed was that courts would superintend that process by deciding which statutory violations cause constitutionally cognizable “injuries” and which do not.

Figuring out how to draw that distinction would not be easy. Certainly, everyone agrees that injuries other than physical or financial injuries count under Article III. Defamation, for example, does not necessarily cause financial harm, but it is well established that the humiliation or injury to reputation counts under Article III. At the oral argument, Justice Breyer asked whether annoyance at receiving unsolicited sales calls during dinner would count as well? What about other invasions of privacy? Or rights that are designed to prevent harm — like the right to receive certain information before taking a medication or the right to receive important services only from people meeting certain qualifications or in the absence of conflicts of interest?
Some Justices may have been concerned that there is no principled way of making these distinctions, short of having judges decide which interests or statutory rights are, in their view, sufficiently important to be worth suing about.

They may also have been concerned about the potentially odd, and complicated, results that would follow from locating this new limitation on private rights of action in Article III. For example, because Article III only limits the jurisdiction of federal courts, plaintiffs might have responded to a ruling in First American’s favor by bringing suit under RESPA and similar statutes in state court, in states that have standing rules more liberal than in federal court. Defendants might have tried to remove those cases to federal court, but the removal statute only permits removal of cases over which the federal court has original jurisdiction (and Article III is generally seen as a limitation on subject matter jurisdiction). If the cases could not be removed, there then would have been a question whether the Constitution permits Congress to establish causes of action that sometimes can only be litigated in state court.
The Court may yet end up confronting those questions in a future case. If, in fact, the Court simply decided that this was not the right case for resolving the Article III question, it could grant cert. on the same question in a future case. But if, instead, the Court dismissed the case because it could not reach agreement on a workable constitutional test, then revisiting the question may be on hold for some time — or at least until the current membership of the Court changes.

UPDATE: It has also been suggested to me that the Court may have dismissed the case because it came to doubt First American’s claim that there could be no financial injury from the kickbacks because the title insurance premium was set by law. In that case, it is possible that the plaintiff might have been able to satisfy even First American’s proposed standing standard.

I am personally skeptical of this explanation — the Court was made aware of this argument before it granted cert. and it would have been easy enough to issue a decision setting out the constitutional standard and then remanding to the lower courts to figure out whether the plaintiff could establish standing under that standard (including by showing that she did, in fact, suffer a financial injury).

Upcoming Oral Arguments

3/31Kimble v. Marvel Enterprises, Inc. Whether the Court should overrule Brulotte v. Thys Co., which held that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se”.

On Monday afternoon Justices Anthony Kennedy and Stephen Breyer testified before the House Appropriations Committee. The purpose of the hearing was to discuss the Court’s budget for the next fiscal year and the federal judiciary, but the legislators also took full advantage of the occasion to touch on other topics as well.